On May 22, 2009 the Company announced a reduction in force at its Champion Publishing subsidiary resulting in the elimination of 24 positions. The Company recorded a charge of approximately $150,000 during the third quarter of 2009 associated with employee related separation costs. The Company incurred an additional $44,000 in restructuring
related expenses during the third quarter of 2009 primarily associated with employee related separation costs.
Champion Industries, Inc. and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, information derived from the Consolidated Statements of Operations as a percentage of total revenues.
|
|
Percentage of Total Revenues
|
|
|
Three Months Ended
July 31,
|
Nine Months Ended
July 31,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
61.8
|
%
|
63.7
|
%
|
62.4
|
%
|
64.4
|
%
|
Office products and office furniture
|
|
|
26.7
|
|
24.7
|
|
26.0
|
|
23.7
|
|
Newspaper
|
|
|
11.5
|
|
11.6
|
|
11.6
|
|
11.9
|
|
Total revenues
|
|
|
100.00
|
|
100.00
|
|
100.00
|
|
100.00
|
|
Cost of sales and newspaper operating costs:
|
|
|
|
|
|
|
|
|
|
|
Printing
|
|
|
46.8
|
|
45.9
|
|
47.0
|
|
45.7
|
|
Office products and office furniture
|
|
|
18.5
|
|
17.1
|
|
18.4
|
|
16.6
|
|
Newspaper cost of sales and operating costs
|
|
|
6.2
|
|
6.1
|
|
6.3
|
|
5.9
|
|
Total cost of sales and newspaper operating costs
|
|
|
71.5
|
|
69.1
|
|
71.7
|
|
68.2
|
|
Gross profit
|
|
|
28.5
|
|
30.9
|
|
28.3
|
|
31.8
|
|
Selling, general and administrative expenses
|
|
|
25.8
|
|
24.8
|
|
26.0
|
|
24.5
|
|
Hurricane and relocation costs, net of recoveries
|
|
|
0.0
|
|
0.0
|
|
(0.1
|
)
|
0.0
|
|
Income from operations
|
|
|
2.7
|
|
6.1
|
|
2.4
|
|
7.3
|
|
Interest income
|
|
|
0.0
|
|
0.0
|
|
0.0
|
|
0.1
|
|
Interest expense
|
|
|
(4.3
|
)
|
(3.2
|
)
|
(3.5
|
)
|
(3.7
|
)
|
Other income
|
|
|
0.0
|
|
0.1
|
|
0.0
|
|
0.0
|
|
Income (loss) before taxes
|
|
|
(1.6
|
)
|
3.0
|
|
(1.1
|
)
|
3.7
|
|
Income tax benefit (expense)
|
|
|
1.7
|
|
(0.3
|
)
|
1.5
|
|
(0.6
|
)
|
Net income
|
|
|
0.1
|
%
|
2.7
|
%
|
0.4
|
%
|
3.1
|
%
|
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Three Months Ended July 31, 2009 Compared to Three Months Ended July 31, 2008
Revenues
Total
revenues decreased 14.7% in the third quarter of 2009 compared to the same period in 2008 from $39.7 million to $33.9 million. Printing revenue decreased 17.3% in the third quarter of 2009 to $20.9 million from $25.3 million in the third quarter of 2008. Office products and office furniture revenue decreased 7.9% in the third quarter of 2009 to $9.0 million from $9.8 million in the third quarter of 2008.
The
decrease in printing sales was primarily associated with the continued impact of the global economic crisis. Office
products and office furniture sales were lower in the third quarter of 2009 when compared to the third quarter of 2008. This was due to lower sales in both office products and office furniture, reflective of the effects of the economic recession.
The Company recorded newspaper revenues associated
with the The Herald-Dispatch of approximately $3.9 million consisting of advertising revenue of approximately $2.9 million and $1.0 million in circulation revenues for the three months ended July 31, 2009. The Company recorded newspaper revenues associated with The Herald-Dispatch of approximately $4.6 million consisting of advertising revenue of approximately $3.6 million and $1.0 million in circulation revenues for the three months ended July 31, 2008. The on-line revenues for the
three months ended July 31, 2009 and 2008
approximated
$271,000 and $444,000 and are recorded as a component of advertising revenue. The reduction in newspaper revenues is primarily associated with a decrease in advertising revenues associated with decreased advertising demand due to the global economic crisis.
Cost of Sales
Total cost of sales decreased 11.8% in the third quarter of 2009 to $24.2 million from $27.4 million in the third quarter of 2008. Printing cost of sales in the third quarter of 2009 decreased $2.3 million over the prior year and increased as a percentage of printing sales from 72.0%
in 2008 to 75.8% in 2009. The printing gross margin dollar decrease resulted from lower sales volume coupled with higher cost of goods sold as percentage of sales resulting from decreased absorption of labor and overhead and higher material costs as a percent of sales. Office products and office furniture cost of sales decreased in 2009 from 2008 levels due to decreased sales which were coupled with lower cost of goods sold as a percentage of office products and office
furniture sales of 69.5% in 2008 compared to 69.3% in 2009, thus representing slight expansion in gross margin percent in the office products and office furniture segment. However, the sales decline led to lower overall office products and office furniture gross margin contribution.
Newspaper cost of sales and operating costs as a percent of newspaper sales were 53.4% and 52.7% for the three months ended July 31,
2009 and 2008.
Operating Expenses
In the third quarter of 2009, selling, general and administrative expenses (S,G&A) decreased on a gross dollar basis to $8.8 million from $9.8 million in 2008, a decrease of $1.1 million or 11.1%. As a percentage of total sales, the expenses increased on a quarter to quarter basis in 2009
to 25.8% from 24.8% in 2008. The decrease in selling, general and administrative expenses is primarily the result of payroll related reductions associated in part with cost reduction initiatives.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Income from Operations and Other Income and Expenses
In
come
from operations decreased in the third quarter of 2009 to $900,000 from $2.4 million in the third quarter of 2008.
This decrease is the result of reduced contributions primarily due to revenue reductions at the Company's printing and newspaper operating segments. The Company was also impacted by certain restructuring related costs primarily associated with payroll related expenses
due to reductions in force of approximately $194,000. Other expenses (net), increased approximately $190,000 from 2008 to 2009 primarily due to an increase in interest expense, resulting from higher rates associated with the financing to purchase The Herald-Dispatch, due to higher applicable margin rates being instituted by the Administrative Agent of the Company's credit facility as a result of certain covenant violations pursuant to the terms of the Credit Agreement.
Income Taxes
The
Company’s effective income tax benefit (expense) rate was a benefit of 106.4% for the third quarter of 2009 and an expense of (9.7%) for the third quarter of 2008.
The income tax benefit (expense) rate is reflective of amortization expense deductions recorded as a permanent difference due to the acquisition of The Herald-Dispatch.
The effective income tax rate approximates
the combined federal and state, net of federal benefit, statutory income tax rate.
N
et Income
Net
income for the third quarter of 2009
was $34,000 compared to $1.1 million in the third quarter of 2008. Basic and diluted earnings per share for the three months ended July 31, 2009 and 2008 were $0.00 and $0.11.
Nine Months Ended July 31, 2009 Compared to Nine Months Ended July 31, 2008
Revenues
Total
revenues decreased 11.6% in the first nine months of 2009 compared to the same period in 2008 to $105.5 million from $119.3 million. Printing revenue decreased 14.3% in the nine
month period
ended July 31, 2009 to $65.8 million from $76.8 million in the same period in 2008. Office products and office furniture revenue decreased 3.3% in the nine month period ended July 31, 2009 to $27.4 million
from $28.3
million in the same period in 2008. The decrease in printing sales was primarily associated with the continued impact of the global economic crisis. The decrease in the office products and office furniture segment was primarily due to lower office product sales partially offset by higher furniture sales.
The Company recorded newspaper revenues associated with
T
he
Herald-Dispatch
of approximately $12.3 million consisting of advertising revenues of approximately $9.3 million and circulation revenues of approximately $3.0 million for the nine months ended July 31, 2009. The Company recorded newspaper revenues associated with The Herald Dispatch of approximately $14.2 million consisting of advertising revenue of $11.0 million and $3.2 million in circulation revenues for the nine months ended July 31, 2008. The on-line revenues
for the nine months ended July 31, 2009 and 2008 approximated $800,000 and $1.2 million and are recorded as a component of advertising revenue. The reduction in newspaper revenue is primarily associated with a decrease in advertising revenues associated with decreased advertising demand due to the global economic crisis.
Cost of Sales
Total cost of
sales decreased 7.1% in the nine months ended July 31, 2009 to $75.6 million from $81.3 million in the nine months ended July 31, 2008. Printing cost of sales decreased 9.1% in the nine months ended July 31, 2009 to $49.5 million from $54.5 million in the nine months ended July 31, 2008. The decrease in printing cost of sales was primarily due to the decrease in printing sales partially offset by a reduction in gross margin percent.
Office
products and office furniture cost of sales decreased 2.3% in the nine months ended July 31, 2009 to $19.4 million from $19.8 million in the nine months ended July 31, 2008 and increased as a percent of sales from 70.0% in 2008 to 70.8% in 2009. The decrease in office products and office furniture cost of sales is attributable to
a decrease
in office products and office furniture sales partially offset by an increase in office products and office furniture cost of sales as a percent of office products and office furniture
sales
. Newspaper cost of sales and operating costs as a percentage of newspaper sales were 54.2% and 49.6% for the nine months ended July 31,
2009 and 2008.
Operating Expenses
During the nine months ended July 31, 2009 compared to the same period in 2008, selling, general and administrative expenses increased as a percentage of sales to 26.0% from 24.5% in 2008. Total S,G&A decreased $1.8 million. The increase in S,G
& A expense as a
percent of sales is primarily due to lower sales. The decrease in total S, G & A is primarily reflective of payroll related reductions associated in part with cost reduction initiatives. These actions were partially offset by increases in bad debt expense.
Champion Industries, Inc. and Subsidiaries
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The Company accounts for goodwill in accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. As required by SFAS No. 142, the Company tests for impairment of goodwill annually (at year-end) or whenever events occur or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its carrying amount. The required two-step approach uses accounting judgements and estimates of future operating results. Changes in estimates or the application of alternative assumptions could produce significantly different results. Impairment is done at a reporting unit level. The Company performs this testing at its operating segments, which are also considered reporting units under SFAS No. 142. An impairment loss generally is recognized
when the carrying amount of the reporting units net assets exceeds the estimated fair value of the reporting unit. The estimates and judgements that most significantly affect the fair value calculation are assumptions related to revenue growth, Earnings Before, Interest, Taxes, Depreciation and Amortization (EBITDA), newsprint prices, compensation levels and discount rate. The Company primarily relies on evaluating cash flows of its segments in evaluating goodwill impairment. The Company determined that it should
perform its impairment testing of goodwill as of January 31, 2009, due to the continuing challenging business conditions and the resulting weakness in the Company's operating performance as of the end of its first quarter. This performance would appear to be related, in part, to the current global economic crisis.
Newspaper trademark and masthead (newspaper titles and web site domain names) are not subject to amortization and are tested for impairment annually (at year end), or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value
of these intangible assets with their carrying amount. The Company performed impairment tests on newspaper trademark and mastheads as of January 31, 2009.
Intangible assets subject to amortization (primarily advertiser and subscriber lists) are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. The carrying amount of each asset group is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from the use of such asset group. The Company performed impairment tests on its long lived assets (including intangible assets subject to amortization) as of January 31, 2009.
No impairment loss was recognized on goodwill, trademarks, masthead or amortizing intangibles at July 31, 2009. The Company will continue to monitor market conditions due to existence of certain indicators which may lead to impairment charges in future periods.
Income from Operations and Other Income and Expenses
Income from operations
decreased 70.9% in the nine month period ended July 31, 2009 to $2.5 million from $8.7 million in the same period of 2008. This decrease is primarily the result of revenue reductions and associated gross margin compaction at the Company's printing and newspaper operating segments.
Other expense (net) decreased $600,000 to $3.7 million in 2009 from $4.3 million in 2008. This is primarily
due to decreases in interest expense, resulting from lower borrowings and lower interest rates associated with the financing to purchase The Herald-Dispatch prior to the Administrative Agent of the Company's credit facility instituting higher applicable margin rates pursuant to the terms of the Credit Agreement as a result of certain covenant violations.
The
Company is subject to various claims and legal actions as well as various governmental audits and examinations. The second and third quarters of 2008 were favorably impacted by certain non-tax related multi-state claims primarily related to various liabilities, specifically related to the Company’s historical accounting treatment. The after tax impact of such items approximated $265,000.
Income Taxes
The
Company’s effective income tax benefit (expense) rate was a benefit of 133.3% for the nine months ended July 31, 2009, and an expense of (15.6%) in the same period of 2008. T
he income tax benefit (expense) rate is reflective of amortization
expense deductions
recorded as a permanent difference due to the acquisition of The Herald-Dispatch. The effective income tax rate approximates the combined federal and state, net of federal benefit, statutory income tax rate
.
Champion Industries, Inc. and Subsidiaries
M
anagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Net Income
Net income for the first nine months of 2009 decreased 89.9% to $377,000 from $3.7 million in the same period of 2008 due to the reasons discussed above. Basic and diluted earnings per share for the nine months ended July 31, 2009 were $0.04 and $0.37 for the nine months ended July 31, 2008.
Inflation and Economic Conditions
Management believes that the effect of inflation on the Company’s operations has not been material and will continue to be immaterial for the foreseeable future. The Company does not have long-term sales and purchase contracts; therefore, to the extent permitted by competition, it has the ability to pass through to
the customer most cost increases resulting from inflation, if any.
The United States economy has been in a recession since December 2007, according to the National Bureau of Economic Research, and it is widely believed that certain elements of the economy such as housing, were in decline before that time. The duration and depth of an economic recession in markets which the Company operates may further
reduce it's future advertising and circulation revenue, printing revenue, office products revenue and office furniture revenue operating results and cash flows.
Seasonality
Historically, the Company has experienced a greater portion of its profitability in the second and fourth quarters than in the first and third quarters. The second quarter generally reflects increased orders for printing of corporate annual reports and proxy statements. A post-Labor
Day increase in demand for printing services and office products coincides with the Company’s fourth quarter.
Our business is subject to seasonal fluctuations that we expect to continue to be reflected in our operating results in future periods. On a historical basis, The Herald-Dispatch’s first and third calendar quarters of the year tended to be the weakest because advertising volume is as
it lowest levels following the holiday season and a seasonal slowdown in the summer months. Correspondingly, on a historical basis the fourth calendar quarter followed by the second calendar quarter tended to be the strongest quarters. The fourth calendar quarter included heavy holiday season advertising. Other factors that affect our quarterly revenues and operating results may be beyond our control, including changes in the pricing policies of our competitors, the hiring and
retention of key personnel, wage and cost pressures, distribution costs, changes in newsprint prices and general economic factors.
Liquidity and Capital Resources
Net cash provided by operations for the nine months ended July 31, 2009, was $ 9.2 million compared to net cash provided by operations of $8.5 million during the same period
in 2008. This change in net cash from operations is due primarily to
reductions in accounts receivable and inventory partially offset by lower net income, lower accounts payable and income tax refunds.
Net cash used in investing activities for the nine months ended July 31, 2009 was $1.2 million compared
to $3.5 million during the same period in 2008. The net cash used in investing activities during the first nine months of 2009 primarily relates to the purchase of the equipment and vehicles. The net cash used in investing activities during the first nine months of 2008 primarily
related to the payment of the working capital adjustment associated
with the acquisition of The Herald-Dispatch and the purchase of equipment and vehicles
.
Net cash used in financing activities for the nine months ended July 31, 2009 was $6.9 million compared to $10.4 million during the same period in 2008. This decrease is primarily due to higher payments on the line of credit in 2008 and a reduction in dividends paid in 2009.
The Company’s off balance sheet arrangements at July 31, 2009 relate to the Syscan acquisition and are associated with a put option from Williams Land Corporation to sell a building to the Company for $1.5 million. This option may be exercised no later than 60 days prior to the end of the lease and closing of said
purchase cannot exceed 45 days from the end of the lease. The lease term concludes effective September 1, 2009. The company exercised its option to purchase this building on June 16, 2009.
Working capital on July 31, 2009 was $(42.9) million and at October 31, 2008 was $20.4 million. The decrease in working capital is associated with the classification as a current liability of approximately $61.7 million of debt which was long-term. This debt was reclassified due to the Company's inability
to remain in compliance with certain of its financial covenants. The Company has been working with the different creditors to restructure the existing debt; however an agreement satisfactory to the Company has not been reached.
Champion Industries, Inc. and Subsidiaries
M
anagement’s Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Environmental Regulation
The Company is subject to the environmental laws and regulations of the United States, and the states in which it operates, concerning emissions into the air, discharges into the waterways and the generation, handling and disposal of waste materials. The Company’s past expenditures relating
to environmental compliance have not had a material effect on the Company. These laws and regulations are constantly evolving, and it is impossible to predict accurately the effect they may have upon the capital expenditures, earnings, and competitive position of the Company in the future. Based upon information currently available, management believes that expenditures relating to environmental compliance will not have a material impact on the financial position of the Company.
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-Q, including without limitation statements including the word “believes,” “anticipates,” “intends,” “expects” or words of similar import, constitute “forward-looking statements” within the meaning of section
27A of the Securities Act of 1933, as amended (the “Securities Act”), and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements of the Company expressed or implied by such forward-looking statements. Such
factors include, among others, changes in business strategy or development plans and other factors referenced in this Form 10-Q , including without limitations under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or
developments.
ITEM 3a. Quantitative and Qualitative Disclosure About Market Risk
The Company does not have any significant exposure relating to market risk.
ITEM 4T. Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer,
we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls were effective as of the end of the period covered by this quarterly report.
(b)
Changes in Internal Controls
. There have been no changes in our internal controls over financial reporting that occurred during the first six months of fiscal year 2009 that have
materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART
II - OTHER INFORMATION
Item 1A. Risk Factors
There were no material changes in risk factors from disclosures previously reported in our annual report on Form 10-K for the fiscal year ended October 31, 2008.
Item 6. Exhibits
(10.1)
|
$600,000 Promissory Note between Champion Industries, Inc. and First Sentry Bank dated June 10, 2009
|
|
Exhibit 10.1 Page 10.1-p 1
|
(31.1)
|
Principal Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Marshall T. Reynolds
|
|
Exhibit 31.1 Page Exhibit 31.1-p1
|
(31.2)
|
Principal Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Todd R. Fry
|
|
Exhibit 31.2 Page Exhibit 31.2-p1
|
(31.3)
|
Principal Operating Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley act of 2002 - Toney K. Adkins
|
|
Exhibit 31.3 Page Exhibit 31.3-p1
|
(32)
|
Marshall T. Reynolds, Todd R. Fry and Toney K. Adkins Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley act of 2002
|
|
Exhibit 32 Page Exhibit 32-p1
|
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHAMPION INDUSTRIES, INC.
Date: September 10, 2009
|
/s/ Marshall T. Reynolds
|
|
Marshall T. Reynolds
|
|
Chief Executive Officer
|
|
|
|
|
Date: September 10, 2009
|
/s/ Toney K. Adkins
|
|
Toney K. Adkins
|
|
President and Chief Operating Officer
|
|
|
|
|
Date: September 10, 2009
|
/s/ Todd R. Fry
|
|
Todd R. Fry
|
|
Senior Vice President and Chief Financial Officer
|